Investment

I can’t think of a time when Americans were more apathetic about getting prepared, and yet this is exactly the time when the urgency to get prepared should be at the highest. Earlier today, my wife Meranda and I were discussing the fact that every single element of “the perfect storm” is coming together just as we had anticipated. One by one, the pieces are all falling into place, and I share the most recent things that my research has uncovered with all of you on a daily basis. Unfortunately, most Americans are absolutely convinced that there is no reason to get prepared for hard times because everything is going to be just great. In America today, most people either believe that the future is going to be totally wonderful or that the future will be totally wonderful once we get rid of Trump. Because so many of us have adopted one of these false narratives, most Americans are partying instead of preparing, and that is going to mean big trouble when things really start going haywire.

Are you familiar with “the rule of three”? I just looked it up on Google, and this is how it is defined…

“You can survive for 3 Minutes without air (oxygen) or in icy water. You can survive for 3 Hours without shelter in a harsh environment (unless in icy water) You can survive for 3 Days without water (if sheltered from a harsh environment) You can survive for 3 Weeks without food (if you have water and shelter)”

Of course these numbers are not exact. For example, many have gone without food for more than 3 weeks without serious problems. But in general, this is a pretty good guideline for survival.

Sadly, if a major emergency were to hit this country tonight, most Americans would be completely unprepared when it comes to even the most basic essentials. In fact, one survey found that only 39 percent of Americans have any sort of an “emergency kit” whatsoever…

When it comes to being prepared for an emergency, 39% say they have an emergency kit, while another 39% have a non-perishable food stock. A little less than one-third (28%) of people have stockpiles of water, and one in four people (25%) have an evacuation plan.

Of those who have an emergency kit, the most common items to have in the kit are: a first-aid kit (86%), flashlights or other light sources (83%), food (65%), water (63%), and blankets (62%).

Those are depressingly low numbers.

So what are all of those people going to do when things hit the fan and the government is not there to rescue them?

Needless to say, a lot of people will really freak out when they can’t get what they need.

But as long as things are relatively “normal”, this astounding lack of preparation will not be a problem. And right now, Americans are acting as if things will be “normal” for the foreseeable future. In fact, most of us are partying like it’s 1999 all over again. According to CNBC, U.S. consumer debt just surpassed the four trillion dollar mark for the first time ever…

Relatively strong holiday spending, particularly in November, and increasing credit card debt added more than $41 billion in outstanding balances at the end of 2018, according to LendingTree, a loan comparison website, which analyzed the data from the Fed.

We are spending money as if there is no tomorrow, and that would be fine if tomorrow never arrived.

Of course we really shouldn’t be spending money so wildly anyway, because many of us are already completely drowning in debt. For example, auto loan delinquencies are already far higher than they were during the peak of the last recession. The following comes from NBC News…

At least 7 million Americans were in serious delinquency on their car loan — 90 or more days behind — at the end of 2018, according to data released Tuesday by the Federal Reserve Bank of New York.

That’s 1 million more than at the end of 2010, after the recession.

And student loan delinquencies also just shot up to the highest level ever. We have never seen anything like this before in modern American history, and yet the party continues to roll on.

For now.

Unfortunately, all parties eventually come to an end, and the end of this one is going to be particularly painful.

When disaster strikes, most Americans are going to be out of resources very, very rapidly. One survey found that 78 percent of all American workers are living paycheck to paycheck. That number is a little higher than other figures that I have seen, but everyone agrees that a solid majority of the country is barely scraping by each month.

When things get really bad, I honestly don’t know how most people are going to make it.

A number of years ago, a survey asked Americans how long they thought they would survive if the electrical grid went down for an extended period of time.

Nearly 75 percent said that they would be dead before the two month mark.

Hopefully you are more resourceful than that. But without a doubt all of us are going to stand a better chance of surviving what is ahead if we make some basic preparations. It’s isn’t rocket science, but if you choose to do nothing because you have blind faith in the system, then you and your entire family could find yourselves in a world of hurt when things start getting really crazy out there.

If we had made different choices as a nation, we could have had a very different future.

Sadly, our self-destructive behavior continues to get even worse, and a day of reckoning for America is fast approaching.

So many top professionals in the financial industry are sounding the alarm about a coming stock market crash right now. And there certainly have been rumblings in 2018 – not too long ago we had a three day stretch that was called “the tech bloodbath”, and during that time Facebook had the worst day for a single company in stock market history. But we haven’t seen the really big “crash” yet. Many have been waiting for it to happen for several years, and some people out there are convinced that it is never going to come at all. Of course the truth is that we are in perhaps the largest stock market bubble that our nation has ever seen, and all other large stock market bubbles have always ended with a major price collapse. So whether it happens immediately or it takes a little while longer, it is inevitable that stock prices will eventually return to their long-term averages.

Doug Ramsey, the chief investment officer at Leuthold Group, is one of those that is sounding the alarm. Unlike price to earnings ratios, price to sales ratios are very hard to manipulate, and he has pointed out that price to sales ratios are higher than we have ever witnessed before.

In particular, when you look at the median stock price to sales ratio, it is the highest that it has ever been and it is twice as high as it was in February 2000…

He also shared a chart which he claims is “unfit for a family-friendly publication” that shows how in terms of median price to sales ratio, the S&P 500 is twice as expensive as it was in 2000.

“Overvaluation in 2000 was highly concentrated; today it is pervasive, with the median S&P 500 Price/Sales ratio of 2.63 times more than double the 1.23 times prevailing in February 2000.

To me, that number is absolutely stunning, and it shows that we have a long, long way to fall.

As I have said before, stock prices need to fall by 40 or 50 percent just to get into a neighborhood where they will begin to make sense again.

Ramsey admits that history isn’t the best guide for the future but the S&P 500’s performance since it touched its peak on Jan. 26 is closely mirroring what happened 18 years ago.

“In the earlier case, a volatile five-month upswing that began in mid-April ultimately fell just a half-percent short of the March 24th high by early September. This year, a similarly choppy, six-month rebound has taken the S&P 500 to within 1% of its January 26th high,” Ramsey said.

Another major indicator that is “flashing red” is correlation.

Just prior to the last two stock market crashes, stock prices began to wildly diverge. While some stocks were still going up, others were cratering big time. This lack of uniformity is often a sign that big trouble is on the horizon. The following comes from CNBC…

In January 2001, before tech went bust, stocks diverged as growth flourished. Everything named dotcom boomed, but old line industries puttered.

There hasn’t been such a divergence between stocks in the overall market since then, not even during the Great Recession.

“Correlation is at one of the lowest levels in the post-War era,” said James Paulsen, chief investment strategist at Leuthold Group. “The combination is damaging. We now have record low correlation at the same time we have high valuations, and the combination is bad for the market.”

“When you have this situation of the lowest quintile correlation against the highest quintile valuation since 1952, you have 10 percent declines on average,” said Paulsen.

When the stock market finally crashes, a lot of people are going to complain that nobody warned them in advance that it was coming, but in reality anybody that cannot see it coming from a mile away must be blind.

There is no question that it is coming. The only question is how soon it will get here.

And it certainly doesn’t help that a trade war has erupted which is greatly disrupting global commerce.

The Peak Pegasus, which is owned by JPMorgan Asset Management, left Seattle on June 8 on a monthlong voyage to the northeastern Chinese city of Dalian. The trade war between the US and China was erupting just as it left, with President Donald Trump imposing tariffs on billions of dollars’ worth of Chinese imports.

If you take an honest look at the numbers, there is no debate that we are in far worse shape than we were just before the financial crisis of 2008. Our debt levels are much higher, stock prices are way more inflated, and financial institutions have become even more reckless. None of the long-term problems that plagued us back in 2008 have been fixed. Instead, the current system was patched up and all of the bubbles were re-inflated. Unfortunately, our attention spans are so short these days, and for most people 2008 seems like ancient history at this point.

But without a doubt a much worse crisis than 2008 is on the way, and most people are going to be absolutely blind-sided by it.

What you are about to see is major confirmation that a new economic downturn has already begun. Last Friday, the government released the worst jobs report in six years, and that has a lot of people really freaked out. But when you really start digging into those numbers, you quickly find that things are even worse than most analysts are suggesting. In particular, the number of temporary jobs in the United States has started to decline significantly after peaking last December. Why this is so important is because the number of temporary jobs started to decline precipitously right before the last two recessions as well.

You see, when economic conditions start to change, temporary workers are often affected before anyone else is. Temporary workers are easier to hire than other types of workers, and they are also easier to fire.

In this chart, you can see that the number of temporary workers peaked and started to decline rapidly before we even got to the recession of 2001. And you will notice that the number of temporary workers also peaked and started to decline rapidly before we even got to the recession of 2008. This shows why the temporary workforce is considered to be a “leading indicator” for the U.S. economy as a whole. When the number of temporary workers peaks and then starts to fall steadily, that is a major red flag. And that is why it is so incredibly alarming that the number of temporary workers peaked in December 2015 and has fallen quite a bit since then…

In May, the U.S. economy lost another 21,000 temporary jobs, and overall we have lost almost 64,000 since December.

If a new economic downturn had already started, this is precisely what we would expect to see. The following is some commentary from Wolf Richter…

Staffing agencies are cutting back because companies no longer need that many workers. Total business sales in the US have been declining since mid-2014. Productivity has been crummy and getting worse. Earnings are down for the fourth quarter in a row. Companies see that demand for their products is faltering, so the expense-cutting has started. The first to go are the hapless temporary workers.

Another indicator which is pointing to big trouble for American workers is the Fed Labor Market Conditions Index. Just check out this chart from Zero Hedge, which shows that this index has now been falling on a month over month basis for five months in a row. Not since the last recession have we seen that happen…

Of course I have been warning about this new economic downturn since the middle of last year. U.S. factory orders have now been falling for 18 months in a row, job cut announcements at major companies are running 24 percent higher up to this point in 2016 than they were during the same time period in 2015, and just recently Microsoft said that they were going to be cutting 1,850 jobs as the market for smartphones continues to slow down.

As I have been warning for months, the exact same patterns that we witnessed just prior to the last major economic crisis are playing out once again right in front of our eyes.

Perhaps you have blind faith in Barack Obama, the Federal Reserve and our other “leaders”, and perhaps you are convinced that everything will turn out okay somehow, but there are others that are doing what they can to get prepared in advance.

It may surprise you to learn that George Soros is one of them.

According to recent media reports, George Soros has been selling off investments like crazy and has poured tremendous amounts of money into gold and gold stocks…

Maybe the best argument in favor of gold is that American legendary investor and billionaire George Soros has recently sold 37% of his stock and bought a lot more gold and gold stocks.

“George Soros, who once called gold ‘the ultimate bubble,’ has resumed buying the precious metal after a three-year hiatus. On Monday, the billionaire investor disclosed that in the first quarter he bought 1.05 million shares in SPDR Gold Trust, the world’s biggest gold exchanged-traded fund, valued at about $123.5 million,” Fortune and Reuters reported Tuesday.

George Soros didn’t make his fortune by being a dummy.

Obviously he can see that something big is coming, and so he is making the moves that he feels are appropriate.

If you are waiting for some type of big announcement from the government that a recession has started, you are likely going to be waiting for quite a while.

How it usually works is that we are not told that we are in a recession until one has already been happening for an extended period of time.

For instance, back in mid-2008 Federal Reserve Chairman Ben Bernanke insisted that the U.S. economy was not heading into a recession even though we found out later that we were already in one at the moment Bernanke made that now infamous statement.

On my website, I have been documenting all of the red flags that are screaming that a new recession is here for months.

You can be like Ben Bernanke in 2008 and stick your head in the sand and pretend that nothing is happening, or you can honestly assess the situation at hand and adjust your strategies accordingly like George Soros is doing.

Of course I am not a fan of George Soros at all. The shady things that he has done to promote the radical left around the globe are well documented. But they don’t call people like him “the smart money” for no reason.

Down in Venezuela, the economic collapse has already gotten so bad that people are hunting dogs and cats for food. For most of the rest of the world, things are not nearly that bad, and they won’t be that bad for a while yet. But without a doubt, the global economy is moving in a very negative direction, and the pace of change is accelerating.

In the end, most people end up believing exactly what they want to believe, and we are not too far away from the time when those choices are going to have very severe consequences.

*About the author: Michael Snyder is the founder and publisher of The Economic Collapse Blog. Michael’s controversial new book about Bible prophecy entitled “The Rapture Verdict” is available in paperback and for the Kindle on Amazon.com.*

When panic and fear dominate financial markets, gold and silver both tend to rapidly rise in price. We witnessed this during the last financial crisis, and it is starting to happen again. Because I am the publisher of a website called The Economic Collapse Blog, I am often asked about gold and silver when I do interviews. In fact, just a few days ago I was sitting right next to Jim Rickards during the taping of a television show when this topic came up. Jim expressed his belief that investing in gold is superior to investing in silver, but I had the exact opposite viewpoint. In this article, I would like to elaborate on why I believe that silver represents a historic investment opportunity right now.

I should start out by disclosing that my wife and I have been able to put away a little bit of silver over the years. I wish that it could have been a lot more, but so often there are other priorities that need to be addressed. For example, I have always said that people need to take care of their emergency food storage first before even thinking about any kind of investments.

But if you have money left over after taking care of the basics, I am fully convinced that silver is a wonderful investment for the mid to long term. In this article, I am going to explain why this is the case. However, I have always warned that you have got to be ready for a rollercoaster ride if you get into precious metals. So if you can’t handle the ups and downs, you should probably avoid them altogether.

As I write this article, the price of gold is sitting at $1254.30 an ounce.

Meanwhile, the price of silver is sitting at just $15.81 an ounce.

That means that the price of gold is currently more than 79 times higher than the price of silver. For the ratio between gold and silver to be this high is truly unusual.

You see, the truth is that there is only about 17 times as much silver as there is gold in the Earth’s crust. And currently silver is being mined at about an 11 to 1 ratio to gold.

So it makes sense that throughout history gold has typically sold at about a 15 to 1 ratio to silver.

During the years to come, I do believe that gold will multiply in price.

But I am also convinced that the price of silver will go up much, much faster.

As they both skyrocket in price, the price ratio between gold and silver will shift very quickly from 79 to 1 in the direction of 15 to 1.

Perhaps we may never even get all the way back to 15 to 1, but if we even got to 40 to 1 or 30 to 1, what that would mean for silver would be history making.

Let us also keep in mind that unlike gold, silver is constantly being used up in thousands of different industrial applications. The following comes from Jeff Nielson…

Over the past quarter century, more silver-based patents have been created than with any other metal on the planet. But not only does silver have unparalleled versatility, it is an extremely potent metal, meaning that in many of its commercial applications it is used in only trace amounts.

Why is this of significance? Because in such tiny quantities it is economically impractical to ever recycle any of this silver, at prices anywhere near the (absurd) levels of recent decades. Thus this silver is being consumed in tiny amounts, but in billions and billions of consumer products, over a span of decades.

Unlike gold, our stockpiles of silver are disappearing. As previously mentioned, for at least the last thirty years, the only way that our strong demand for silver could be satisfied has been through consuming portions of these stockpiles.

It has been estimated that approximately one billion ounces of silver have been used in consumer products over the past ten years alone.

Even if the world could somehow avoid the great financial turmoil that has already begun, the truth is that eventually a great demand crunch for silver would come just based on how much of it we are steadily consuming.

At less than 16 dollars an ounce right now, silver is ridiculously undervalued.

Those that are wise see this, and they are stocking up on silver coins at an unprecedented level. Just check out these numbers…

Silver Eagle sales will likely jump by 25% in the first quarter due to deteriorating market conditions. During the first three months last year the U.S. Mint sold 12 million Silver Eagles. Already, sales of Silver Eagles have reached 13 million. There are two weeks remaining in March and the U.S. Mint will likely sell another two million. This will put total Silver Eagle sales for the first quarter at 15 million….. the highest ever.

I have always said that I believe that the price of silver will eventually go over $100 an ounce.

When that happens, those that got in today will be exceedingly happy with their returns.

Others are projecting even greater gains. For instance, investing legend Egon von Greyerz believes that the price of silver could ultimately go as high as $660 an ounce, and Jeff Nielson believes that $1,000 an ounce for silver would be a fair price.

But once again, don’t even think about getting into precious metals until you have the basics squared away. It is often said that you can’t eat gold or silver, and that is very true.

In our new television show, my wife and I are always going to tell it to you straight. A lot of people out there are relaxing right now because they think that the recent stock market rally means that the crisis is over. What they don’t understand is that this new financial crisis is just in the very early chapters. There are going to be more ups and more downs, and the shaking that we have seen so far is just the beginning.

Many of you may not want to believe me at this moment, but by the end of 2016 life in America is going to look dramatically different than it does right now. So please get prepared while you are still able to do so.

Did you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st? We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“. In other words, it could be a “Lehman Brothers moment” for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that “hot money” has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money. But the truth is that what has been happening in China surpasses all of their efforts combined. You can see an incredible chart which graphically illustrates this point right here. As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article…

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.

Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.The result?The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding.Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.Optimists say China is getting its credit addiction under control, but that’s not correct.In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a “bond headache” as well. At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years. Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?

In the end, it doesn’t really matter. The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

The vast majority of Americans are going to be absolutely blindsided by what is coming. They don’t understand how our financial system works, they don’t understand how vulnerable it is, and most of them blindly trust that our leaders know exactly what they are doing and that they will be able to fix our problems. As a result, most Americans are simply not prepared for the massive storm that is heading our way. Most American families are living paycheck to paycheck, most of them are not storing up emergency food and supplies, and only a very small percentage of them are buying gold and silver for investment purposes. They seem to have forgotten what happened back in 2008. When the financial markets crashed, millions of Americans lost their jobs. Because most of them were living on the financial edge, millions of them also lost their homes. Unfortunately, most Americans seem convinced that it will not happen again. Right now we seem to be living in a “hope bubble” and people have become very complacent. For a while there, being a “prepper” was very trendy, but now concern about a coming economic crisis seems to have subsided. What a tragic mistake. As I pointed out yesterday, our entire financial system is a giant Ponzi scheme, and there are already signs that our financial markets are about to implode once again. Those that have not made any preparations for what is coming are going to regret it bitterly. The following are 17 signs that most Americans will be wiped out by the coming economic collapse…

#1 According to a survey that was just released, 76 percent of all Americans are living paycheck to paycheck. But most Americans are acting as if their jobs will always be there. But the truth is that mass layoffs can occur at any time. In fact, it just happened at one of the largest law firms in New York City.

#227 percent of all Americans do not have even a single penny saved up.

#5 Wages continue to fall even as the cost of living continues to go up. Today, the average income for the bottom 90 percent of all income earners in America is just $31,244. An increasing percentage of American families are just trying to find a way to survive from month to month.

#7 Small business is becoming an endangered species in America. In fact, only about 7 percent of all non-farm workers in the United States are self-employed at this point. That means that the vast majority of Americans are depending on someone else to provide them with an income. But what is going to happen as those jobs disappear?

#8 In 1989, the debt to income ratio of the average American family was about 58 percent. Today it is up to 154 percent.

#9 Today, a higher percentage of Americans are dependent on the government than ever before. In fact, according to the U.S. Census Bureau 49 percent of all Americans live in a home that gets direct monetary benefits from the federal government. So what is going to happen when the government handout gravy train comes to an end?

#11 It is estimated that less than 10 percent of the U.S. population owns any gold or silver for investment purposes.

#12 It has been estimated that there are approximately 3 million “preppers” in the United States. But that means that almost everyone else is not prepping.

#1344 percent of all Americans do not have first-aid kits in their homes.

#1448 percent of all Americans do not have any emergency supplies stored up.

#1553 percent of all Americans do not have a 3 day supply of nonperishable food and water in their homes.

#16 One survey asked Americans how long they thought they would survive if the electrical grid went down for an extended period of time. Incredibly, 21 percent said that they would survive for less than a week, an additional 28 percent said that they would survive for less than two weeks, and nearly 75 percent said that they would be dead before the two month mark.

#17 According to a survey conducted by the Adelphi University Center for Health Innovation, 55 percent of Americans believe that the government will come to their rescue when disaster strikes.

Just because you are living a comfortable middle class lifestyle today does not mean that it will always be that way.

If you doubt this, take a look at what is going on in Greece. Many formerly middle class parents in Greece have become so impoverished that they are actually dumping their children at orphanages so that they won’t starve…

Scores of children have been put in orphanages and care homes for economic reasons; one charity said 80 of the 100 children in its residential centres were there because their families can no longer provide for them.

Ten percent of Greek children are said to be at risk of hunger. Teachers talk of cancelling PE lessons because children are underfed and of seeing pupils pick through bins for food.

If the U.S. economy crashes and you lose your job, how will you and your family survive?

Will you and your family end up homeless and totally dependent on the government for your survival?

As stocks have risen in recent years, the big hedge funds and the “too big to fail” banks have used borrowed money to make absolutely enormous profits. But when you use debt to potentially multiply your profits, you also create the possibility that your losses will be multiplied if the markets turn against you. When the next stock market crash happens, and the gigantic pyramid of risk, debt and leverage on Wall Street comes tumbling down, will highly leveraged banks such as Goldman Sachs ask the federal government to bail them out? The use of leverage is one of the greatest threats to our financial system, and yet most Americans do not even really understand what it is. The following is a basic definition of leverage from Investopedia: “The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.” Leverage allows firms to make much larger bets in the financial markets than they otherwise would be able to, and at this point Goldman Sachs and the big hedge funds are pushing leverage to ridiculous extremes. When the financial markets go up and they win on those bets, they can win very big. For example, revenues at Goldman Sachs increased by about 30 percent in 2012 and Goldman stock has soared by more than 40 percent over the past 12 months. Those are eye-popping numbers. But leverage is a double-edged sword. When the markets turn, Goldman Sachs and many of these large hedge funds could be facing astronomical losses.

Sadly, it appears that Wall Street did not learn any lessons from the financial crisis of 2008. Hedge funds have ramped up leverage to levels not seen since before the last stock market crash. The following comes from a recent Bloomberg article entitled “Hedge-Fund Leverage Rises to Most Since 2004 in New Year“…

Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008.

Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show.

So why is this so important?

Well, as a recent Zero Hedge article explained, even a relatively small drop in stock prices could potentially absolutely devastate many hedge funds…

What near record leverage means is that hedge funds have absolutely zero tolerance for even the smallest drop in prices, which are priced to absolute and endless central bank-intervention perfection – sorry, fundamentals in a time when global GDP growth is declining, when Europe and Japan are in a double dip recession, when the US is expected to report its first sub 1% GDP quarter in years, when corporate revenues and EPS are declining just don’t lead to soaring stock prices.

It also means that with virtually all hedge funds in such hedge fund hotel names as AAPL (the stock held by more hedge funds – over 230 – than any other), any major drop in the price would likely lead to a wipe out of the equity tranche at the bulk of AAPL “investors”, sending them scrambling to beg for either more LP generosity, or to have their prime broker repo desk offer them even more debt. And while the former is a non-starter, the latter has so far worked, which means that most hedge funds have been masking losses with more debt, which then suffers even more losses, and so on.

By the way, Apple (AAPL) just fell to an 11-month low. Apple stock has now declined by 26 percent since it hit a record high back in September. That is a very bad sign for hedge funds.

But hedge funds are not the only ones flirting with disaster. In a previous article about the derivatives bubble, I pointed out the ridiculous amount of derivatives exposure that some of these “too big to fail” banks have relative to their total assets…

According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 362 times greater than their total assets.

That is utter insanity, but we haven’t had a derivatives crash yet so everyone just keeps pretending that the emperor actually has clothes on.

When the derivatives crisis happens, things in the financial markets are going to fall apart at lightning speed. A recent article posted on goldsilverworlds.com explained what a derivatives crash may look like…

When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivates (think JP Morgan, Citygroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.

But for now, the party continues. Goldman Sachs and many of the big hedge funds are making enormous piles of money.

In fact, according to the Wall Street Journal, Goldman Sachs recently gave some of their top executives 65 million dollars worth of restricted stock…

Goldman Sachs Group Inc. GS -0.76% handed insiders including Chief Executive Lloyd Blankfein and his top lieutenants a total of $65 million in restricted stock just hours before this year’s higher tax rates took effect.

The New York securities firm gave 10 of its directors and executives early vesting on 508,104 shares previously awarded as part of prior years’ compensation, according to a series of filings with the Securities and Exchange Commission late Monday.

And the bonuses that employees at Goldman receive are absolutely obscene. A recent Daily Mail article explained that Goldman employees in the UK are expected to receive record-setting bonuses this year…

Britain’s army of bankers will re-ignite public fury over lavish pay rewards as staff at Goldman Sachs are expected to reward themselves £8.3 billion in bonuses on Wednesday.

The American investment bank, which employs 5,500 staff in the UK, will be the first to unveil its telephone number-sized rewards – an average of £250,000 a person – as part of the latest round of bonus updates.

The increase, up from £230,000 last year, comes as British families are still struggling to make ends meet five years after banks brought the economy to the brink of meltdown.